Plenty still in the pipeline

It’s long been a trap for companies absorbed by the development of a major project: while management focuses on the mammoth and time-consuming task, investors start to look to propositions offering more short-term excitement.

The result is often a share price rut between a final investment decision and first production.

The full-year result was the first set of numbers since Santos formally approved its Gladstone liquefied natural gas project.

With offtake agreements from the project stitched up, financing in the bag and details of GLNG’s economics in the public domain, yesterday’s results and subsequent briefings had the potential to be very dull.Instead, what Santos produced a result containing enough shiny new things to keep the attention of investors who would otherwise be asking where the next share-price driver would come from.

Santos
chief
David Knox
dedicated a lot of time to discussing four new projects which, as they come into production this year, will lift Santos’s annual production capacity by around 20 per cent.

The projects – Reindeer and Spar in Western Australia, the Chim Sao oilfield in Vietnam and Wortel in Indonesia – have all been in Santos’s growth plans for some time. But GLNG has dominated investors’ attention and such projects have been off their radars.

Knox does not need to look far for examples of share price stagnation: Woodside Petroleum is trading at the same levels it was at when it approved Pluto LNG for development in 2007, while Oil Search has been trading mostly underwater since the Papua New Guinea LNG project was approved.

Oil Search shares have broken out of their malaise since the market’s confidence around an eventual expansion of PNG LNG improved.

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Knox must convince the market that there are other, executable, growth projects in Santos beyond GLNG. His comments about the company’s efforts to secure some domestic gas contracts linked to the oil price will also grab attention.

Domestic gas contracts linked to oil could in the longer term turn out to be an enormously significant turning point for Santos.

At this stage the contracts have been inked in WA, where higher gas prices have been the norm for some time thanks in large part to the state’s oil price-linked LNG exports.

Santos will see this is the way of the future in eastern Australia, where it has long been a supplier of gas for domestic markets.

An oil price-linked gas contract in eastern Australia is not too far away. Santos will start the ball rolling when it effectively sells some of its Cooper Basin gas to itself by piping gas from the Cooper into GLNG.

There is an air of inevitability in that relationship extending beyond the Santos-GLNG deal to east-coast gas prices. Such a transition could eventually wind up being as important to Santos as the replacement of annual iron ore contracts with quarterly settlements has become for BHP Billiton.

Santos now receives for its gas the equivalent of $25 a barrel of oil – well below spot prices of about $100. Gas will never fetch the same as oil, but it would not take too much of an improvement in the correlation of domestic prices with oil prices to make a real difference to the earnings Santos receives from its core business.